Home Most Popular The Aluminium Battle: Europe and U.S. Gear Up for a Showdown

The Aluminium Battle: Europe and U.S. Gear Up for a Showdown

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By Pratima Desai

LONDON, March 4 (Reuters) – Lock and load! European and U.S. buyers are revving their engines, ready to roll into a tense showdown over Middle Eastern aluminium. The European Union is contemplating a ban on Russian metal, a move that could set off a chain reaction of price wars reminiscent of the intense skirmishes witnessed in 2018 during the imposition of sanctions on Rusal.

As the curtain rises on this high-stakes drama, a fierce race for aluminium from Middle Eastern nations like the United Arab Emirates and Bahrain is set to unfold. The surge in demand will stoke the flames of inflation for Western firms in the transportation, packaging, and construction sectors – industries already grappling with soaring raw material and labor costs.

Aluminium, the darling of the electric vehicle industry, now takes center stage as a crucial ingredient. Lighter than steel, this versatile metal has become the go-to choice for a plethora of electric vehicle components.

While the EU is yet to pull the trigger on fresh sanctions targeting Russian aluminium, discussions have been ongoing for months. Insider sources hint at a forthcoming proposal for a new import ban, a move sparked by the second anniversary of Russia’s incursion into Ukraine.

The International Aluminium Institute reveals that Middle Eastern producers accounted for a jaw-dropping 6.2 million metric tons, nearly 9% of global supplies in the previous year. Of this, approximately two million tons found their way to Europe and the United States.

If the Russian supply faucet were to be abruptly shut off, Europe would face a cavernous deficit of around 500,000 tons, a void that the reactivation of dormant capacity in the region could help partially bridge. However, not all gaps can be filled so easily.

“Middle Eastern suppliers won’t be able to immediately substitute Europe’s shortfall,” cautioned Dmitri Ceres of PerenniAL, a U.S.-based aluminium trader.

Physical market aluminium buyers currently shell out the London Metal Exchange (LME) price in addition to a premium covering transport, handling costs, and taxes.

“For Europe to attract aluminium away from rival regions like the United States, European premiums will need to escalate. Similarly, U.S. premiums must also ascend to ensure a steady influx of metal,” noted Ceres.

European duty-paid premiums skyrocketed by a staggering 45% in the subsequent month, while U.S. premiums surged by 20% during the same period.

Anticipating the LME Response

While price hikes are anticipated in the aftermath of a potential ban, they are unlikely to reach the dizzying heights witnessed in 2018 due to surpluses in Asia. Moreover, Russian supply is expected to shift towards China, a key consumer of Russian aluminium post the Ukraine conflict.

The magnitude of the market’s reaction hinges on whether the LME, in response to EU sanctions, opts to prohibit Russian origin aluminium – constituting a whopping 90% of inventories in LME registered warehouses.

“Should Rusal’s output be shunned on the LME, with non-Russian alternatives in short supply, physical premiums and LME prices could potentially spike dramatically,” warned Bank of America analyst Michael Widmer.

Steered by self-sanctions and imposing 200% tariffs on U.S. imports, many American enterprises have diversified away from Russian sources, looking increasingly towards the Middle East and other destinations.

Trade Data Monitor statistics reveal that U.S. imports of Russian aluminium plummeted to 16,902 tons last year, a mere 0.4% of the total volume, down from 4% in 2022 and close to 9% in 2018.

Despite a reduction in EU imports of Russian aluminium, the numbers remain substantial. TDM data indicates that EU imports totaled 512,122 tons in 2023, amounting to 8% of the total, a slide from 12% in 2022 and 19% in 2018.

“EU sanctions aimed at Russian aluminium will trigger higher premiums in Europe, necessitating an upward adjustment in U.S. premiums to maintain competitiveness,” affirmed David Wilson, an analyst at BNP Paribas.

“Already elevated European premiums, coupled with increased shipping costs from the Middle East and other Asian regions due to Red Sea disturbances, are poised to escalate further,” Wilson added.

Freight expenses have surged owing to Houthi militant attacks on vessels traversing the Red Sea, a critical trade route facilitating East-West commerce through the Suez Canal.

In 2023, EU imported nearly 1.2 million tons of aluminium from the Middle East, comprising a substantial 18.8% of the total. Meanwhile, the U.S. brought in over 800,000 tons, translating to 19.3% of their total aluminium imports.

Aluminium production by region can be viewedhere.

Top six sources of EU aluminium imports can be foundhere.

Top six sources of U.S. aluminium imports are detailedhere.

(Reporting by Pratima Desai; editing by Veronica Brown and Emelia Sithole-Matarise)

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